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February 6, 2024

Future of office market still a big unknown for Maine's real estate industry, report says

white building and parking lot COURTESY / THE BOULOS CO. Cumberland County bought 27 Northport Drive in Portland in October for $4.58 million to consolidate offices there as a center of operations. But only time will tell how quickly the office market in general rebounds, the Boulos Co. said.

The big question mark in Maine's real estate industry is the office market, according to the Boulos Co.’s recently issued 2024 market outlook.

“Will employers find the right carrot — or stick — to bring employees back to the office?” wrote Jessica Estes, the company’s president. “If not, when leases come up, many tenants will either give up their office space entirely, or downsize.”

Estes noted that the Biden administration recently introduced incentives to convert office buildings to residential space, which is expected to help take some aging product out of inventory. 

“But only time will tell how quickly the office market rebounds, and there are many forces at play,” Estes said.

Nate Stevens, a partner and designated broker, said the office outlook for this year is more promising than recent performance, based on the availability of “gray space” —  or office space that isn’t vacant but will be in the near future.

The amount of gray space in the last two years has been significant. 

“However," Stevens said, "we are not tracking as much gray space this year, which could mean a plateau year or even a slight decrease in vacancy next year."

He continued, “Demand over the last 12 months for office space is the strongest it has been since the pandemic and while we can expect some sublease spaces to convert to direct vacancies, we do not anticipate a major shift in the market in either direction.”

2024 projections for other sectors

Industrial: Jon Rizzo, a partner and broker, said debt markets will be “a big piece of the puzzle in 2024. If financial institutions continue to tighten their lending standards throughout the year, as we saw in 2023, it is going to be a tough road.” However, he continued, construction costs appear to be stabilizing and perhaps coming down, which could mean an increase in new inventory. With tight inventories, he said, the question remains whether tenants will find a home or perhaps expand their search radius. He added, “proactive planning, well before lease expiration dates, is extremely important.”

Capital markets: Chris Paszyc, a partner and broker, said the firm predicts commercial real estate investment volume will fall year-over-year, continuing a downtrend that started in 2022. “However, the state of Maine will outperform the national averages and continue to be viewed favorably on a national stage,” Paszyc wrote.

Retail: Joe Italiaander, an associate broker, said that, while industrial and office market are getting all the news, “what has often gone unmentioned in commercial real estate news, both on the macro and local levels, is the viability, resilience and success of the retail sector over the last couple of years.” Italiaander said retail is a constant in Maine — and resilient in the face of e-commerce and Amazon. The sector has seen strong leasing volume, brand expansions (and contractions), and retail development activity.

“Perhaps the most exciting news of the year is the grand opening of the long-awaited Costco at Scarborough Downs,” he wrote. Maine has proven to be ripe for expansion, but supply is constrained, resulting in a significant premium on freestanding, single-tenant properties and strip buildings, he said. Italiaander predicted continued growth. “I am excited to see a variety of names expand their footprint, while other out-of-state brands look to enter the Greater Portland market and beyond.”

Central Maine: Chris Romano, an associate, said that, while the region’s commercial real estate market has traditionally been saturated by office space, the region “is unique in that its major employers and office tenants are health care, education and governmental companies and organizations. In fact, these occupants have cultivated a surprisingly robust office market.” Positive signs include Colby College’s ongoing investment in Waterville and major projects in the pipeline such as North River Co.’s redevelopment of the former Lockwood Co. cotton mill.

Lewiston-Auburn: Noah Stebbins, a broker with the firm, said Lewiston-Auburn’s commercial real estate market continued on an upward trajectory over the past year, with new commercial/residential development projects announced or in the works, new retailers, strong industrial demand and motivated city officials, aiming to transform their respective downtowns.

“Looking ahead, we expect commercial real estate fundamentals to remain robust through 2024, regardless of headwinds from the current economic climate,” Stebbins wrote. That could include new housing units and business expansions, affordable housing options, and zoning ordinance reviews to encourage development projects. He added “it is important to note that the Twin Cities have motivated city officials who are willing to work in conjunction with developers, businesses and nonprofit organizations, which is encouraging for 2024 and beyond.”

Midcoast: Roy Donnelly, an associate, said the midcoast region benefitted from relocation trends spurred by the pandemic and the subsequent run-up in values. Many new residents are retirees or remote workers. “While in-migration is beneficial, the demographic makeup of those moving to the midcoast does not necessarily align with employers relocating, or retailers viewing the region as a hub of consumption,” Donnelly said.

However, oceanfront real estate, picturesque towns, fishery and other maritime activity, and robust hospitality and tourism sectors are strong underpinnings for the region, he said. Donnelly predicted that development will be tempered in the short-term by the increased cost of debt and in the medium-term by an aging workforce. “However, as Portland and Cumberland/York counties continue to approach their carrying capacity, the way of life that exemplifies Maine can still be found heading up the coast on U.S. Route 1,” he concluded.

For the full report, click here.

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